GameFly to USPS: higher postage than Netflix costs us $730K per month

GameFly has been fighting the United States Postal Service for two years over …

GameFly is a service where customers pay a monthly fee to rent games which are delivered via the US Postal Service—kind of the Netflix of gaming. The mailing of these games, and the danger of games breaking in transit, are major ongoing concerns for the company, and in 2009 GameFly filed a complaint with the United States Postal Service alleging that Netflix mailings were given priority over—not to mention better rates than—GameFly's mailings.

On March 23, the president of GameFly wrote to the Postal Regulatory Commission asking that the complaint be resolved. The reason is startling: the cumulative cost difference between the shipping of a Netflix and GameFly disc exceeds the net monthly income of the company.

"GameFly filed this complaint nearly two years ago. Before that, GameFly spent 18 months working with the Postal Service in an attempt to informally resolve the issues on which the complaint was based," David Hodess, president and CEO of GameFly, wrote to the Postal Regulatory Commission. The next paragraph of that letter, sent to Ars via an anonymous source, is a jaw-dropper. Update: you can read the letter for yourself.

The issue needs to be resolved quickly, and the reason is purely financial. "At the company's current volume of approximately 1.2 million shipments per month, the difference between the two-ounce flat rate of $1.05 that GameFly must pay to avoid automated letter processing for most of its DVD mailers, and the one-ounce letter rate of $0.44 that Netflix pays to avoid automated letter processing of return mailers, amounts to about $730,000," Hodess wrote. "This amount represents more than 100 percent of GameFly's monthly net income in 2011."

GameFly had already complained about the length of the proceedings in 2010. "This complaint case has been pending before the Commission since April 23, 2009—almost a year ago. Continued delay threatens irreparable injury to GameFly," the company wrote. The volume of mailings reported then is the same as now, 1.2 million per month. That's bad news for the company, as its profits are being eaten by postage fees and growth appears to have stagnated.

Netflix and GameFly ship differently

The media may be the same, but GameFly and Netflix mail their discs in very different ways, and at a different scale of operations. GameFly has four shipping locations, whereas Netflix has 58. Additionally, it's a simple thing to visually separate Netflix sleeves from the rest of the mail for manual sorting, as those discs are mailed in brightly colored sleeves. GameFly, on the other hand, has made its packaging blend in with standard mail as a way to reduce theft.

GameFly has estimated that it pays $50 per game, and that's a major issue when a game is broken or stolen. To keep those losses at a minimum, GameFly uses a cardboard insert to protect the disc, which in turn adds significant weight to the mailers. Netflix discs are mailed in paper sleeves, and are much lighter.

The methods of shipping also vary. "Both Blockbuster and GameFly utilize Business Reply Mail for their return mail pieces, which requires an accounting step to assess postage due fees; while Netflix utilizes Permit Reply mail where return postage is prepaid and the postage due assessment step is not required," Larry J. Belair, the senior plant manager for the US Postal Service in San Diego said in a 2010 filing. He also pointed out that other companies that ship discs in bulk use letter-shaped mailers, while GameFly alone uses flat-shaped sleeves.

Belair also explained why Netflix sleeves are handled differently than most mail. "When volume densities of a single DVD rental company's pieces warrant, postal employees may segregate all of that company's pieces (that are located—some are not found) in separate trays so they can avoid downstream handling," he explained. "Segregation can begin as far upstream as the rental customer's delivery unit." Belair estimates that 97 percent of DVD mailers belong to Netflix, while only 1 percent come from GameFly.

So there are multiple things here that contribute to Netflix's streamlined operations: the sleeves are mailed in a way that requires less work by the USPS, the discs are mailed in packages that are shaped a specific way and are brightly colored to aid in manual sorting, they're lighter than GameFly mailers, and Netflix operates at a much higher volume than the game rental service.

It's going to be a hard sell to get the Post Office to change GameFly discs' fees and handling, especially if the company is unwilling or unable to change the method, size, shape, and coloring on its sleeves. There are two competing forces at work here: the cost of replacing broken or stolen games versus higher shippings costs.

GameFly may characterize Netflix as receiving preferential treatment, but the reality is much more nuanced. What's clear is that the shortest path to higher profits appears to be further streamlining of the game rental outfit's shipping methods, although each path in that chain opens the company to higher rates of breakage or theft.

We contacted GameFly for comment on the letter, but have yet to receive a reply.

I agree with DaveSimmons, and will further state disgust with Gamefly's misuse of the legal system. They have a clear path to lower rates through changing their system, but instead choose to pursue legal channels.

Sounds like they have a poorly designed business model for handling the movement of their product. I was a subscriber to their service for a few months, and the mailers are far larger than Netflix and blend in too much.

As for their monthly operating income, they could probably fix some of that if they actually had a decent service. In the 3 months I used them, I got a game from the top 10 of my queue once. It was great if I wanted to play titles from 6-12 months ago, but if you wanted anything newer, chances were low that you'd get it in any sort of timely manner.

Netflix by contrast. An actually have a new release to you shortly after it's out. Sure, less cost in the DVD rental model, but there is also a far higher volume. Gamely hasn't address basic problems in their model, and blaming the post office doesn't change that.

Sounds like Gamefly is screwed. They ship in heavier mailers to protect their more expensive disks. In the end, their shipping is going to cost more. If it's because of physical weight, insurance, or size. They'll have to increase their shipping costs, and pass it onto the consumer.

I've found that in order to get new releases from both services, you just need to follow some rules.

For Netflix, I send a movie back on Saturday. That ensures that they will get the movie on Monday, when they are sending out the new releases for Tuesday delivery. Also, the new release has to be at the top of the queue.

For Gamefly, I have to send a game back by Wednesday the week before the new release. Then ensure that the only game in my queue is the one I want.

I've had no problems getting tons of new releases from both companies using this method.

Gamefly previously asserted that they had to use the cardboard sleeve because their discs weren't handled with the same care that Netflix's discs were, and they were getting damaged by the postal service as a result.

I do not understand their use of the square mailers, though. As far as I know, square mailers cost more because the sorters can't easily arrange the mail so the important info is horizontal. Actually, that last part is my guess, but I do know that square costs more to mail than rectangular.

Well, when Gamefly ships in brightly colored mailers, does so in the sheer bulk of Netflix, and reduces the weight of the mailers to match those of Netflix they can get rates similar to Netflix.

I don't think the bulk should necessarily matter. As long as they are mailing in what can reasonably be considered "bulk" (they are) they should be treated the same as Netflix.

The other points stand, though. There are several fundamental differences in their mailings, the higher rate is warranted.

Bixmen wrote:

Sounds like Gamefly is screwed. They ship in heavier mailers to protect their more expensive disks. In the end, their shipping is going to cost more. If it's because of physical weight, insurance, or size. They'll have to increase their shipping costs, and pass it onto the consumer.

This I could get behind. I have little desire to pay $14.99/month for Netflix 2 out, especially if there aren't a lot of movies that I want to watch. Their $8.99 streaming only option is more desirable but not feasible for gaming (OnLive not withstanding). I have even less desire to pay $22/month for one game out at a time.

I do not understand their use of the square mailers, though. As far as I know, square mailers cost more because the sorters can't easily arrange the mail so the important info is horizontal. Actually, that last part is my guess, but I do know that square costs more to mail than rectangular.

With a square mailer, there are one out of four ways that can be correct so that a machine can read it. with a rectangular mailer, there are only two out of four ways.

I wonder if going with a Netflix like shipping would, even with damage and theft, be less than the shipping costs they currently acrue? If they went for the same size/color as Netflix that could prevent some theft issues (blend in) and take it from there. I am sure they considered this so the damage, theft, lost/misdelivered rate must be pretty high.

Back in the beginning, Netflix mailers were very similar to Gameflys current; cardboard, reinforced, squarish. They obviously studied how to comply with the archaic USPS rate system to their benefit (thin, light, rectangular). I rarely get a damaged disc from Netflix in the current mailer. Gamefly should quit spinning their wheels on trying to change (lol) the USPS and change their mailers to comply.

Gamefly just made stupid licensing deals. If your cost of replacement for a broken disc is the same as a stolen/lost disc, that’s your fault. The disc itself isn’t the valuable part, it’s the data. So if they should have negotiated a lower replacement cost for discs that are destroyed with proof, vs those that are stolen/lost. There’s a big difference from a business standpoint, since lost/stolen still has a potentially usable disc available that is not the same threat to a sale as a destroyed disc. Seems like that missed a key part of their agreements. When companies do that, there is no sympathy.

That sucks and may explain why their shipping speeds are slower and their membership prices are kinda high. Their trade in program was pretty nice though. You could sell them games for gamefly credit to use on your membership or to purchase games through them. However, I stopped using Gamefly because of their shipping speed ( slow ) and the cost ( 15.99 per month for one game out ).

This I could get behind. I have little desire to pay $14.99/month for Netflix 2 out, especially if there aren't a lot of movies that I want to watch. Their $8.99 streaming only option is more desirable but not feasible for gaming (OnLive not withstanding). I have even less desire to pay $22/month for one game out at a time.

I think that gets you two games out unless they changed the pricing structure

1/26/2006Netflix Hires Former Postmaster General As COONetflix’s favorite scapegoat for slow DVD turnaround is the United States Postal Service. If you have ever asked Netflix Customer Service why it is taking so long for your DVDs to be checked in, a Netflix employee has probably implied to you that USPS is slow and incompetent and should be blamed for any delays.

Oddly, Netflix has hired, former U.S. Postmaster General, William J. Henderson as its new chief operations officer (COO). This brings up an interesting question. If USPS is so incompetent that they cannot transport DVDs in a timely and reliable manner, why would Netflix give one of its highest and most critical positions to a former USPS leader? Perhaps Netflix has more faith in USPS than they are willing to admit.

The fact is that USPS does have some problems, but getting mail delivered is not one of them. USPS handles mind-boggling volumes of mail each day, and an amazingly high percentage gets delivered to the intended destinations on time.

The reality is that William Henderson is now probably the most competent and ethical person in the Netflix organization. Congratulations, Netflix on making a wise addition to your staff. Now that you have a major USPS insider on the management team, please stop blaming USPS for delays.

Couldn't be some extra special treatment by virtue of hiring a former pseudo government employee who still has his staff over there and has promised them sweet jobs when they want to leave so they give Netflix the 'friend of Bill' discount? Nah.

It's not at all clear to me that a government corporation should be giving preferential treatment to Netflix, which uses this treatment as a competitive advantage in the marketplace.

Volume discounts are fine - but 1% of all DVD shipments through rental services (or games, whatever) is a huge volume. The same goes for pickups - either the postal service picks up GF's discus (meaning they are segregated at pickup) or they are dropped off together. Either way, any 'mixing' is a result of USPS's *inducement* of mixing, not GF's.

The whole concept of the first class monopoly is that there is a uniform postal rate to use USPS's boxes. The notion that Netflix should get advantaged usage of that service is asinine as long as it is a government supported operation (USPS that is). Congress should force USPS to charge the same rates to all customers (with freedom to introduce discounts for volume that are reasonable and non-discriminatory). Where else is Netflix going to go for shipping? I'm already standing behind USPS's multi-billion dollar pension obligations, I don't want my tax dollars subsidizing Netflix, too.

Seems to me that even Netflix is arguing that eventually these economies of scale will turn against them since they no longer see the disc rental market as their primary source of income for the future. So if Gamefly will wait a few years longer, they'll see Netflix suffer from the same problems they are.

It'll be interesting to see how they react then. That said, I think Gamefly needs to realize the writing is on the wall. In two years or less, new consoles are going to be announced. Consoles where the games will almost certainly be digitally delivered to kill piracy once and for all. People are not adverse to this, at least not nearly as much as they once were. And publishers would love the idea of games that are phoning home to them constantly to be sure they are legit. Meanwhile, console makers would love the larger cut of the sales. Stores will hate being hardware distribution centers, I'm sure, but Gamestop sold the PSPGo, didn't they?

Gamefly needs to be getting off the disc gravy train and finding a way onto the digital distribution express. If they don't, they won't have anything but a brand name that'll be bought in the future by a third party to tie to a digital distribution scheme. For super-cheap.

1/26/2006Netflix Hires Former Postmaster General As COONetflix’s favorite scapegoat for slow DVD turnaround is the United States Postal Service. If you have ever asked Netflix Customer Service why it is taking so long for your DVDs to be checked in, a Netflix employee has probably implied to you that USPS is slow and incompetent and should be blamed for any delays.

Oddly, Netflix has hired, former U.S. Postmaster General, William J. Henderson as its new chief operations officer (COO). This brings up an interesting question. If USPS is so incompetent that they cannot transport DVDs in a timely and reliable manner, why would Netflix give one of its highest and most critical positions to a former USPS leader? Perhaps Netflix has more faith in USPS than they are willing to admit.

The fact is that USPS does have some problems, but getting mail delivered is not one of them. USPS handles mind-boggling volumes of mail each day, and an amazingly high percentage gets delivered to the intended destinations on time.

The reality is that William Henderson is now probably the most competent and ethical person in the Netflix organization. Congratulations, Netflix on making a wise addition to your staff. Now that you have a major USPS insider on the management team, please stop blaming USPS for delays.

Couldn't be some extra special treatment by virtue of hiring a former pseudo government employee who still has his staff over there and has promised them sweet jobs when they want to leave so they give Netflix the 'friend of Bill' discount? Nah.

Possible, yet I'm curious about the timeline of Netflix' switch in packaging. It could be as simple as, "hey, your shipping model sucks for USPS. Do this, this, this, don't do that & you'll decrease your shipping times & decrease the shipping price per DVD."

Seems to me that even Netflix is arguing that eventually these economies of scale will turn against them since they no longer see the disc rental market as their primary source of income for the future. So if Gamefly will wait a few years longer, they'll see Netflix suffer from the same problems they are.

It'll be interesting to see how they react then. That said, I think Gamefly needs to realize the writing is on the wall. In two years or less, new consoles are going to be announced. Consoles where the games will almost certainly be digitally delivered to kill piracy once and for all.

Not going to happen. Not enough people are online with a fast enough connection to provide a download only service.

Why should the Postal Service (A quasi -government agency ) not give the same postage deal to Gamefly it gives to Netfix and Blockbuster. If you read the previous complaint they noted a bunch of problems with theft by postal employees (19 were caught), thus the plain mailers. Also the postal service seems to be pulling Netflix DVDs out of the mail stream before running them through equipment and damaging them (essentially hand sorting which should cost more.)

why can't the just fix the envelope size to what netflix uses, each side bright orange, and use a firm non carboard sleeve instead of the thicker cardboard? there's bound to be something that protects close but is lighter.. thick poster board or something...

I've never been a gamefly subscriber so I didn't know how their mailers were handled. I was origionally going to side with gamefly until I read the article that described the issue in detail. They obviously are using a method of mailing that is completely different than netflix. Postage method, shape, weight, and a method to prevent theft? Sounds like it takes more work and more work requires more cost.

As a long time Netflix subscriber and avid gamer my solution to the problem is for Netflix just buy out GameFly already and offer a 1-out-at-a-time as part of the subscription similar to what Blockbuster does with their mail-based program. That's my nirvana. I'd even pay a small premium for the privilege ('bout the same as the BluRay premium).

Mailing game disks in Netflix envelopes wouldn't stop breakage, but theft wouldn't likely be a problem as a potential thief would never know if the thing in the red envelope was a crappy movie or a hit game.

Their $8.99 streaming only option is more desirable but not feasible for gaming (OnLive not withstanding).

I'd imagine that it would be relatively easy to do online game rentals. Much like you download a game or demo on your PC or console, you could offer a Steam-like service that only authorizes the game for the rental period. I'm sure there will be people cracking files and distributing but that already happens with DVD rentals and it hasn't stopped Netflix. I'd much rather rent a game and have it show up on my computer or console in a few hours/overnight than wait days for it to ship.

Sounds like Gamefly is stupid. They mail heavier mailers, in different sizes, and expect to get Netflix's rates?

Also, they're idiots. Mail in Netflix style mailers, and I bet the stolen and broken disks won't add up to $750,000 a month.

I'm guessing that they could also reduce the cost from $50-$60 per disk that's broken if they work with the publishers since they're rebuying a game to replace damaged media. And we all know that we're not buying the game, we're buying a license because the publishers have been saying this for years now. So paying $1-$3 replacements for broken disks is reasonable since they've already paid the license. Something like that would probably offset a lot of that cost too.

I had GameFly for a while, but I realized that on average I kept the games for two months, and by the time I got them, played them, and sent them back, it was actually CHEAPER to buy them after the price drop that the game inevitably had while I was waiting on them to get the game I wanted to me.

I did love the way you could keep a game from them, pay a lower rate for the used game, and buy the game and they would mail you the box and everything. I got Odama that way after it became hard to find...do they even still do that?

Either way, I started subscribing to Netflix and Gamefly about the same time, years ago, and I'm still a Netflix subscriber...but dropped Gamefly YEARS ago, even though I play games probably three times more than I watch movies.

why can't the just fix the envelope size to what netflix uses, each side bright orange, and use a firm non carboard sleeve instead of the thicker cardboard? there's bound to be something that protects close but is lighter.. thick poster board or something...

hate to see gamefly go away. best way to get games imo.

I agree, 100%. Jesus, doesn't Gamefly have anyone there that has either worked for the government or closely? This is easy stuff. Do what they say and they do what they say they will do. but you can't deviate. As you said--surely there is something lighter that would still protect but get the weight down. This is probably the biggest differentiator. Make the package more rectangular and adjust that "cardboard orange" to "Safety orange" or something.

As a long time Netflix subscriber and avid gamer my solution to the problem is for Netflix just buy out GameFly already and offer a 1-out-at-a-time as part of the subscription similar to what Blockbuster does with their mail-based program. That's my nirvana. I'd even pay a small premium for the privilege ('bout the same as the BluRay premium).

Mailing game disks in Netflix envelopes wouldn't stop breakage, but theft wouldn't likely be a problem as a potential thief would never know if the thing in the red envelope was a crappy movie or a hit game.

I always thought they would do this. It makes sense for Netflix, too, imo. People get a movie adn ship it out pretty quickly. Games they might keep 1-2 weeks, or more.

Seems to me that even Netflix is arguing that eventually these economies of scale will turn against them since they no longer see the disc rental market as their primary source of income for the future. So if Gamefly will wait a few years longer, they'll see Netflix suffer from the same problems they are.

It'll be interesting to see how they react then. That said, I think Gamefly needs to realize the writing is on the wall. In two years or less, new consoles are going to be announced. Consoles where the games will almost certainly be digitally delivered to kill piracy once and for all.

Not going to happen. Not enough people are online with a fast enough connection to provide a download only service.

and the people who do have a fast enough connection are being saddled with bandwidth caps anyway..

As someone who is always trying to strike a delicate balance of shipping, accounting, business, and customer service best practices @ my tiny workplace, I'm just glad to see confirmation that navigating the complexity of it all involves painful tradeoffs no matter how high up the foodchain you get.

To make one quick response to the "net neutrality" comment: no. The marginal costs of transporting atoms are far higher then they are for bits. UPS and FedEx both offer volume discounts the more you ship with them; the NetFlix-USPS deal described here seems no different and all of it seems completely fair... The volume discount thing sort of seems the opposite of the NN situation--shipping companies want to keep their biggest customers so they give them incentives; telcos want to take over their biggest customer's businesses by implementing vertical monopolies and so they want to charge them MORE, not less.